Drawdowns are good !

July 30, 2024 3 min read

The S&P 500 has nearly 195 years of data, showing the annual returns and the maximum drawdowns. Drawdowns are the peak-to-bottom declines in each year. In this extensive data, there are very few years with negative returns. Between 1928 and 1951, due to the Great Depression and World War II, there were more negative years. From 1952 to 1975, despite the Vietnam War, there were many positive years. The 1980s were particularly strong, with only three negative years in 25 years. In the last 23 years, there have been only six negative years, highlighting a generally positive trend.

Source : Charlie Bilello

Drawdowns in Different Eras

Drawdowns used to be very steep in the early 20th century, with significant drops during the Great Depression and World War II. For example, the market saw declines of 44%, 44%, 57%, and 51% in consecutive years. The 1987 Black Monday crash was another major drawdown of 23%. The dot-com bust in the early 2000s saw declines of 17%, 29%, and 33%. The Global Financial Crisis (GFC) in 2008 resulted in a 48% drop. The COVID-19 pandemic in 2020 caused a 33% drop, followed by a 25% drop in 2022. Despite these steep drawdowns, the market has shown resilience and recovery.

Recovery After Drawdowns

Despite significant drawdowns, the S&P 500 has a history of recovering quickly. For instance, after a 7% drop, the market often returned to positive territory the next year. Even during the harsh periods like the early 2000s and the GFC, recovery was relatively swift. For example, after the 36% drop during the GFC, the market bounced back in the following years. Similarly, after a 4% drop in 2018, the market recovered the next year. The COVID-19 crash was also followed by a quick recovery, showing the market’s resilience.

Drawdowns Are a Part of Investing

Drawdowns are a natural part of market cycles. Investors should not fear them. Historically, markets have always bounced back, even after severe declines. For instance, the period from 2000 to 2006 saw multiple years of drawdowns, but the market eventually recovered. The key takeaway is that markets always come back, and there is no need to panic during drawdowns if the long-term view of the economy and market is positive.

Importance of New Capital During Drawdowns

During market downturns, bringing in new capital can significantly speed up recovery. Investing more during declines can help investors take advantage of lower prices and benefit from the subsequent recovery. This strategy requires a strong mindset and confidence in the long-term potential of the market. Training your mind to stay calm and focused during drawdowns is crucial for successful investing.

Preparing for Future Drawdowns

Currently, the market is hitting all-time highs, but investors should be aware that drawdowns can happen at any time. Preparing for these eventualities when the market is performing well can help investors remain calm and rational during downturns. Understanding that drawdowns are temporary and the market will eventually recover is essential. Staying informed and having a solid investment strategy can help navigate through market fluctuations smoothly.

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